by Sumit Sharma

Buying your first home is an exciting milestone, but it’s also a significant financial commitment that requires careful planning.In India, the average age of homebuyers has now shifted to the 30s, particularly for those targeting properties within the sub-₹1 crore range. Simultaneously, buyers in their mid-40s and older are increasingly opting for premium homes priced at ₹1 crore and above. Millennials, who constitute 52% of the demand, are the key drivers of this real estate boom, with a growing appetite for best-in-class assets.

However, securing the right home loan is a crucial part of the process, and with the right approach, you can make informed decisions that will benefit you in the long run. This guide will walk you through the steps to plan your first home loan effectively.

1. Assess Your Financial Situation

Before you start house hunting, it’s essential to evaluate your financial health. Understanding where you stand financially will help you determine how much you can afford to borrow and repay comfortably.

Key Steps:

• Check Your Credit Score: Your credit score plays a vital role in determining your loan eligibility and interest rate. A score of 750 or higher is ideal, but many lenders offer loans to those with lower scores at slightly higher rates.
• Calculate Your Debt-to-Income Ratio: This ratio compares your monthly debt payments to your gross monthly income. Lenders typically prefer a ratio below 40%. If your ratio is higher, consider paying down some debt before applying for a loan.
• Evaluate Your Savings: In addition to the down payment, you’ll need funds for closing costs, moving expenses, and an emergency fund. Aim to save at least 20% of the home’s purchase price for a down payment to avoid private mortgage insurance (PMI) and secure better loan terms.

2. Determine How Much You Can Afford

Once you’ve assessed your finances, it’s time to figure out how much you can afford to spend on a home. This amount should be realistic, considering your current income, future income potential, and lifestyle needs.

Key Considerations:

• Use a Home Loan Calculator: Online calculators can help you estimate your monthly payments based on different loan amounts, interest rates, and repayment tenures.
• Factor in Additional Costs: Remember to include property taxes, home insurance, maintenance, and utility costs in your budget. A common rule of thumb is that your housing costs (including mortgage, taxes, and insurance) should not exceed 30-35% of your monthly income.
• Plan for the Long Term: Consider how your financial situation might change in the coming years. Will your income likely increase? Are you planning to start a family or make other significant life changes? These factors will impact your ability to afford a home.

3. Research Loan Options

There are various home loan options available, each with its own set of terms, interest rates, and eligibility criteria. It’s crucial to research and compare different loan products to find the best fit for your needs.

Types of Home Loans:

• Fixed-Rate Loans: These loans offer a fixed interest rate for the entire tenure, providing stability in monthly payments. They are ideal if you plan to stay in your home for a long time.
• Floating-Rate Loans: The interest rate on these loans fluctuates with market conditions. While they may start lower than fixed-rate loans, they can increase over time, which can be beneficial if rates drop but risky if they rise.
• Government-Backed Loans: In some countries, first-time homebuyers can access special loan programs with lower interest rates or down payment requirements. For instance, in India, the Pradhan Mantri Awas Yojana (PMAY) offers subsidies to eligible buyers.

Tips for Comparison:

• Compare Interest Rates: Even a slight difference in interest rates can significantly affect the total cost of your loan over time.
• Consider Loan Tenure: While longer tenures reduce monthly payments, they increase the total interest paid. Shorter tenures mean higher monthly payments but less overall interest.
• Check for Additional Charges: Look for any hidden fees or charges, such as processing fees, prepayment penalties, or legal fees.

4. Plan for Repayment

Your mortgage will likely be one of your largest monthly expenses, so it’s important to plan for repayment from the start. Consider how you’ll manage your loan over the long term.

Repayment Tips:

• Set a Budget: Create a monthly budget that accounts for your mortgage payments, other debts, and living expenses. This will help you manage your finances and avoid missing payments.
• Consider an EMI Holiday: Some lenders offer a grace period at the start of the loan, where you don’t have to make EMI payments. This can be helpful if you need time to settle into your new home or manage other expenses.
• Think About Prepayment: If you come into extra money (e.g., a bonus or inheritance), consider using it to make a prepayment on your loan. This can reduce your loan tenure and save on interest costs.

Planning your first home loan involves careful consideration of your financial situation, thorough research of loan options, and strategic planning for repayment. By following these steps, you can confidently navigate the home loan process and make your dream of homeownership a reality. Remember, the key to a successful home loan is being informed, prepared, and proactive throughout the process.

Sumit Sharma is Founder & CEO of Radian Finserv Private Limited, Views are Personal